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Can Cintas (CTAS) Beat Q3 Earnings on Holistic Growth?

Leading business service provider Cintas Corporation (CTAS - Free Report) is scheduled to report third-quarter fiscal 2017 results after the closing bell on Mar 22. In the last reported quarter, adjusted earnings missed the Zacks Consensus Estimate by a penny. Let’s see how things are shaping up for this announcement.

Key Factors in the Quarter

With continued focus on core businesses, Cintas’ revenues have steadily increased over the past few quarters. It aims to achieve revenue build-up by increasing penetration levels at existing customers and broadening customer base to include fresh business segments. The company also identifies additional product and service opportunities for its current and future customers to expand its portfolio. This focused approach for steady top-line growth is commendable.

Cintas has further received the regulatory approvals for the acquisition of rival G&K Services Inc. With annual revenues of approximately $1.0 billion, G&K Services has over 170,000 customers in the U.S. and Canada. The successful integration of G&K Services is likely to expand Cintas’ customer profile and augment its revenues. The combined company is likely to cater to over one billion business customers with an extended product portfolio and additional processing capacity.

Customer service is also likely to improve with increased route density. The synergies from the combined operations are expected to yield $130 million to $140 million in cost savings and the transaction is anticipated to be accretive to Cintas’ earnings from the second year of its operation. Although the transaction is not likely to have any direct impact on the impending quarterly results, it is likely to attract favorable contracts from existing as well as new customers and improve the top line.

However, a persistent challenging macroeconomic environment has mostly driven customers to perform certain in-house services themselves, instead of outsourcing them to Cintas. This has often resulted in some loss of businesses in the past and is likely to lead to lower earnings in the to-be-reported quarter as well.

In addition, the company procures raw materials from a wide variety of domestic and international suppliers, making it susceptible to market risks. The volatility in raw material costs such as cotton may weigh on the margins in the upcoming quarterly results. Also, U.S. and foreign trade policies, tariffs and other impositions on imported goods, trade sanctions, and limitations on the imports of certain types of goods, particularly after Brexit, are likely to affect its profitability.

Earnings Whispers

Our proven model does not conclusively show that Cintas is likely to beat earnings this quarter as it lacks the key components. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. This is not the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

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